Financial Projection of Ratios (3 Years)
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Financial Projection of Ratios (3 Years)Financial Ratios Definitions
Use these ratios to gauge your solvency,
liquidity, operational efficiency and profitability. They are also useful
measures to compare your business with others in your industry.
Profitability Ratios
Gross profit margin Formula: Gross profit/Sales
This important ratio measures your
profitability at the most basic level. Your total gross profit total ( which is
net sales - cost of goods sold) compared to your net sales . A ratio less than
one means you are selling your product for less than it costs to produce. If
this ratio is remains less than one, you will not achieve profitability
regardless of your volume or the efficiency of the rest of your business.
Operating profit margin Formula: Operating income/Sales
This ratio measures your profitability
based on your earnings before interest and tax (EBIT). This measure is used to
gauge the efficiency of the business before taking any financing means into
account (such as debt financing and tax considerations). This ratio is often
used to compare the operating efficiency between similar businesses.
Net profit margin Formula: Net income/Sales
Often referred to as the bottom line, this
ratio takes all expenses into account including interest.
Liquidity Ratios
Current ratio Formula:Current assets/Current liabilities
Your current ratio helps you determine if
you have enough working capital to meet your short term financial obligations.
A general rule of thumb is to have a current ratio of 2.0. Although this will
vary by business and industry, a number above two may indicate a poor use of
capital. A current ratio under two may indicate an inability to pay current
financial obligations with a measure of safety.
Quick ratio Formula: (Current assets - Inventory)/Liabilities
Also known as the 'Acid Test', your Quick
Ratio helps gauge your immediate ability to pay your financial obligations.
Quick Ratios below 0.50 indicate a risk of running out of working capital and a
risk of not meeting your current obligations. While industries and businesses
vary widely, 0.50 to 1.0 are generally considered acceptable Quick Ratios.
Operating Ratios
Inventory turnover ratio Formula: Cost of goods
sold/Inventory
This ratio measures the number of times
your inventory 'turned-over' during a time period. Generally, the higher this
ratio the better your use of inventory. Low numbers indicate a large amount of
capital tied up in inventory that may be more efficiently used elsewhere.
Sales to receivables ratio Formula: Net sales/Net receivables
This ratio measures the number of times
your receivables 'turned over'. The higher the number, the more efficient you
are at collecting your accounts receivable. A ratio that is too high or one
that is increasing over time, may indicate an inefficient use of your working
capital. It is important to compare this ratio to other businesses in your
industry.
Times interest earned Formula: Profit before interest and
taxes/Total int. charges
TIE may be used by bankers to assess your
ability to pay your liabilities. The TIE ratio determines how many times during
the year your business has earned the annual interest costs associated with
servicing its debt. Your banker will be
looking for your TIE ratio to be 2.0 or greater, showing that your business is
earning the interest charges two or more times each year.
Return on assets Formula: Net income before taxes/Total assets at
beginning of period
This ratio helps show how assets are being
used to generate profits. One of the most common financial measures, it can be
an effective tool to compare the profitability of two companies. If your return
on assets is lower than a competitor, it may be an indication that they have
found a more efficient means to operate through financing, technology, quality
control or inventory management.
Return on equity Formula: Net income/Net worth at beginning of period
Return On Equity is often used to determine
if a company consumes cash or creates assets.
Return On Equity can also help you evaluate trends in a business. And
ROE can also be used to compare the performance between companies in the same
industry.
Return on investment (ROI) ratio
The ROI is perhaps the most important ratio
of all. It is the percentage of return on funds invested in the business by its
owners. In short, this ratio tells the owner whether or not all the effort put
into the business has been worthwhile. If the ROI is less than the rate of
return on an alternative, risk-free investment such as a bank savings account,
the owner may be wiser to sell the company, put the money in such a savings
instrument, and avoid the daily struggles of business management.
Solvency Ratios
Debt to worth ratio Formula:Total liabilities/Net worth
Also called the leverage ratio, it is used
to help describe how much debt is used to finance the business. While some debt
may be prudent, depending on too much debt financing can increase risk.
Working capital Formula: Current assets - Current liabilities
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